Why Your Appraisal Matters in a Home Purchase

It’s important to understand the major contingencies in a purchase agreement, and one of the most important ones is the appraisal.

All lenders will require that a licensed appraiser determine the value of the property. This appraisal represents an unbiased and objective value opinion. The appraiser studies recent comparable sales in the neighborhood, making adjustments for various attributes such as number of bedrooms, bathrooms, parking, remodeling and the like. In the end, he or she arrives at a value for the property, which will hopefully be at least what you’re paying. (The appraisal can sometimes end up being more than you’re paying, which is great for you but doesn’t affect the loan.)

The appraiser submits the appraisal document to the lender, whose underwriter reviews the material. If the appraisal is “at value” for the price you’re paying, the underwriter will approve the appraisal—or could require more time if they have any issues with the content. If the appraisal is under the value you’re paying, the bank won’t kick in the difference. It will then be up to the buyer to bring in more money, or potentially negotiate with the seller to reduce the price.

Your appraisal contingency will cover you if the appraised value comes up short. If you don’t have that contingency, you’ll be in a position to cover the shortfall with more cash, or your good faith deposit sitting in escrow can be at risk. Your contingency timeframe has to allow for the appraiser to visit the property, complete/submit the written appraisal to the lender, and the underwriter to review and sign off.

It is very important for you or your agent to consult the lender about how much time will be needed for this contingency. I’ve recently had lenders tell me that it will only be seven days for the process to be complete, yet that seven days seems to cover only the time for the appraisal to get to underwriting. That means the buyer will have to potentially remove the contingency prior to underwriting giving its blessing, and that is not ideal.

Lending World Lurches On

We had quite a spirited discussion in the Pacific Union Market Watch meeting this morning about loans, escrows, and new lender regulations. In a nutshell, it’s key that buyers and sellers set their expectations for delayed or even cancelled escrows.

Though loans funding smoothly in 30 days or less used to be the norm, there’s a landmine of issues to navigate in the current market. And that’s slowing everything down. There’s the lender who funded a loan and then reversed the wire to the title company on the day escrow was scheduled to close, subsequently deciding not to fund. Banks are requiring multiple appraisal reviews, which are sometimes resulting in denied loans. Loans are being rejected due to a particular property characteristic (i.e., an unwarranted unit). A second loan review is often being ordered shortly before closing, delaying the close of escrow. Even buyers with as much as 50% down are enduring the scrutiny.

And to add to the fun, Regulation Z—which implements the federal Truth in Lending Act—takes effect today. This regulation will impose timing restrictions and disclosure requirements that may affect the speed with which buyers can secure their loans at any financial institution.

What it all boils down to is that buyers and sellers need to be prepared for serious delays in closing transactions. My advice these days to clients is not to count on a sale closing on time. In other words, if you’re in contract on a purchase that is dependent on your home first selling, you might want to consider renting in the interim and pursuing a purchase after you have your sale proceeds in hand.

And buyers moving from a rental to a new home may want to consider delaying giving notice to their landlord until, well, their purchase sale closes. That might mean paying an extra month’s worth of rent, but the alternative could be joining the ranks of the homeless if your loan doesn’t close until two weeks after the initial close of escrow.